Euro convergence a dream, not a goal

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Ever since the launch of Europe's single currency five years ago, a hapless group of economists has tried to track something called the "euro-area" economy. But it has become painfully clear that the euro area does not have an economy.

Instead, Europe seems stuck with what it had before the euro was created - 12 national economies all going along pretty much as before.

Slowly, the markets are waking up to the fact that convergence is not happening. This has two important consequences. It will make the economic management of the euro area increasingly difficult. And it will produce bigger asset-price swings within the European countries - smart investors will want to make sure they are on the right side of those bubbles.

Look at how the European economies are developing this year. In the second quarter, the euro area grew at a 2 per cent annual rate. This shows just how meaningless averages are. It creates an impression of moderate, steady expansion. Yet the truth is that some European countries are growing quickly. And some are stuck in a slump.

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Ireland's gross domestic product grew more than 6 per cent in the first quarter compared with a year earlier, and Spain's added 2.8 per cent. Greece's economy expanded 3.9 per cent in the second quarter and France's grew 3 per cent.

You might think Europe was doing moderately well, given that it has mature, developed economies and ageing populations.

Yet look elsewhere. The Austrian economy expanded 0.7 per cent in the first quarter. Portugal's rate was just 0.1 per cent in the same period. The Dutch economy grew 1.1 per cent in the second quarter from a year earlier, as did Italy's, and German GDP growth was 1.5 per cent. Not much sign of convergence there.

The picture changes little if you look at the different components of the economy.

Developments of economic activity continue to diverge among Euroland countries, both in the short and the long term. THOMAS MAYER, Deutsche Bank AG

How fast are consumer prices rising in Europe?

In Spain, they climbed 3.3 per cent in August from a year earlier. And in Greece they surged 2.9 per cent in July. Yet in Germany, prices rose just 2 per cent in August. And in the Netherlands, they edged up just 1.2 per cent in July, close to a third of the Spanish rate.

And how are the jobless totals?

European Union figures show that in Ireland, only 4.5 per cent of the workforce was out of a job in June. In Austria, the figure was just 4.2 per cent. In Germany, the jobless rate was 9.8 per cent and in France 9.5 per cent.

Not much sign of convergence there, either. In truth, talk of euro-area growth, employment and inflation rates are a polite fiction. They do not exist. Yet convergence among Europe's different economies was a main promise of the euro.

Even the EU, usually a euro fan, admits that something unexpected is happening.

"The first years of EMU have seen persistent differences in economic growth between participating member states," according to the Quarterly Report on the Euro Area published by the European Commission. "Excessive cyclical divergence can impair the smooth functioning of an economic and monetary union."

Indeed. Other economists have noticed that something is amiss. "Developments of economic activity continue to diverge among Euroland countries, both in the short and the long term," said Thomas Mayer, chief European economist at Deutsche Bank AG in London.

One factor might be the euro itself. Each country had to follow different policies to meet the criteria for euro membership. This has produced different economic results.

Another reason is that the impact of a single currency may have been exaggerated. The euro area has the same money, the same interest rate, and increasingly integrated capital markets. Yet each nation has different labour markets, tax systems and demographics. These factors may be more important in determining real growth rates.

Without some evidence of real convergence soon, even ardent supporters of the euro may have to ask whether it is actually working.